Stage 3: a low price, high volume car (Gen III, to be released in 2016 or 2017)

This plan matches well to the technology adoption curve. My investment in Tesla is a bet that when the Gen III is released it will reach the mainstream market and see explosive growth. It's planned to cost less than $40,000, and have a minimum range of 200 miles.

Elon Musk

The main reason I believe in Tesla is Elon Musk. He has a solid track record founding Zip2, PayPal, and Space X. He has risked his own fortune on Tesla. He was also in a similar position when he founded PayPal. Many other "green tech" companies are failing, like Fisker, Coda, and Solyandra. PayPal was an unlikely survivor of the .com crash, and many of their competitors failed due to problems with fraud. PayPal was able to survive by focusing on the highest risk problems, and I see a direct parallel with Tesla's focus on battery and charging technology.

Thinking like a VC

Tesla is a speculative stock and I don't judge it on fundamentals like P/E ratio. I use criteria that Venture Capitalists use like a strong vision, a good team, long term obsession (started in 2003 and AC propulsion before that), a huge market (2012 14.5M vehicles sold in US, and 80 million worldwide) and fanatical early adopters.

Why? EVs are technically superior to ICE

EVs are technically superior to ICE (internal combustion engines). Some of these advantages are specific to Tesla, but are largely true of all EVs. Charging the Model S is cheaper than gas (approximately 1/5 the cost, plus free superchargers for trips). There is no stopping at gas stations, less maintenance (eg. no oil changes) and no emission testing. The heater warms up immediately. It accelerates quickly because engine is electric, and has no transmission, so full torque is available at any speed. The Model S handles well because the floor is heavy from the batteries, and it lowers the center of gravity. It has a lot of room (see frunk) because the engine is the size of a watermelon and sits between the two back wheels (eliminating the driveshaft) Also, long term we have to move to sustainable energy because oil is finite resource. Although energy from the power grid is not sustainable today, it's likely to be long term. Even today EVs power from the grid is 3 times more efficient than an ICE.

Why now?The Model S represents an inflection point in battery energy density and cost. The current barrier to mainstream adoption of EVs is the cost and range of the batteries. Just as cell phones in the 80s were large, expensive and had short battery life, the EV suffers from the same problems currently. Historically energy density improves 7-8% yearly in battery technology and that trend will likely lead to improved price and performance that is superior ICE. ICE are not undergoing the same improvements in price and performance.

Tesla's battery technology is ahead of competitors. Telsa’s “secret sauce” is the battery pack. Tesla battery packs use thousands of standard Lithium ion batteries (commonly used in laptops), which lowers cost and supply chain risk. Although the batteries are commodities, the technology surrounding them is secret. The batteries are liquid cooled, and have higher energy density than competitors. I suspect the software managing the battery is critical. Also, Tesla is working with their battery supplier, Panasonic, to produce batteries optimized for use in an automobile.

The innovator’s dilemma: why existing competitors are likely to fail

Incumbent market leaders typically fail to adopt to disruptive technologies. Existing businesses have too many conflicts and lack focus to adopt. It is similar to IBM's failure to adopt to the PC revolution like Apple and Microsoft. Other examples include sail ships versus steam boats, hydraulic excavators versus cable actuated, and vertically integrated steel mills versus mini mills.

They typically focus on current customer needs (see innovator’s dilema). Often new technology, like Tesla, is ridiculed in it’s early stages, but that is a positive indicator to many Venture Capitalists. Since their customers don't take the technology seriously, neither do the incumbent businesses. People say electric cars are toys for the rich, and the same comparison were made about early car models. They typically focus on their core competencies, in the case of existing car manufacturers that is mechanical engineering and the incremental improvement of the ICE, not battery technology.

There are competing vehicles from existing car manufacturers, but Tesla is currently outselling all of them. The Chevy Volt, Nissan Leaf and Ford Focus are more expensive than the cars they are competing against. Whereas the Model S is competing with cars in it’s prices range (Mercedes S Class, BMW 7 series, and Audi A8). Tesla Stores and SuperChargers are strategic innovations that existing car companies are currently showing no interest in.

Tesla Stores

Tesla stores and internet sales model eliminates the overhead of dealerships. It lowers inventory and storage costs (Imagine a world without car lots!). The prices are fixed, and there is no haggling. The stores increase exposure and impulse shopping by being in high traffic areas, like malls. The trade off is you can't drive it off the lot.

Existing dealerships are fighting Tesla, and many state laws prevent Tesla from closing the sale in the store. Tesla is unlikely to concede short term because their interests are not aligned. Dealerships are focused on volume, not on selling a new, niche products. Existing dealerships make a large profit on service centers. EVs require much less service, and Tesla’s strategy is operate maintenance centers at break even. No car company in the last 90 years has succeeded using the dealership model. The existing car companies can not afford the risk of alienating their dealerships to experiment with other sales models. Tesla needs to resolve this issue before Gen III cars go to market. It's likely Tesla will prevail because popular opinion is in their favor, and silicon Valley tech companies are increasingly relying on social media to defeat incumbent businesses in political battles.

Super Chargers

Tesla superchargers helps address range anxiety and facilitate long trips. Super Charger use is free to customers. The Super Charger rent is low because they they often increase the value of the property by using existing parking and drawing high net worth drivers. The power costs are also low because they largely run on solar power. Super Chargers can now transfer 3 hours of drive time in 20 minutes. Tesla feeds high power DC voltage into the batteries at the SuperChargers to reduce charging time. This is a key strategic and engineering development that is, to my knowledge, not on the radar for other car companies.

Tesla’s Super Chargers are designed to work with Teslas and it’s possible Tesla’s main business could end up being selling drive trains and super charger access to other car companies. They currently sell electric drive trains to Mercedes and Toyota. As stated by a JP Morgan analyst, Adam Jonas, regarding super chargers... "we may be witnessing an interplay of technology, industrial strategy and capital not unlike Cornelius Vanderbilt and the railroads, or Thomas Edison and electrical distribution." Tesla may be setting the standard for high voltage DC transfer for charging for generations to come. They are also storing energy in battery packs at the super charges, presumably to reduce demand at peak hours. I suspect the long term goal is to rapidly charge vehicles without being constrained by the power available from the grid.

The Model S is awesome.

It won the MotorTrend car of the year. Consumer reports gave it a 99 out of 100. Test drive one if you're not convinced.

Tesla is considered by some investors to be a tech company, not an automobile company. Cars are becoming increasingly software oriented. Elon Musk's software experience at PayPal is an asset. Also, Tesla is in silicon valley, the heart of the computer software industry. Over The Air software updates are one example of Tesla leading in software engineering. The 17 inch display looks like a big ipad. I wouldn't be surprised to see an app store one day. Remember, the secret sauce for the battery is the software. Plus, I suspect, Tesla wil be able to adopt new software driven technologies like auto-pilot faster than other car companies, because high tech electronics and software is in their DNA.

Financing Plan and Resale Value

Tesla is offering a financing plan that is similar to a lease, but it allows the tax rebates of ownership that range from $7,500 to $15,000. The tax rebates effectively covers the down payment. The customer makes monthly payments, and Tesla will buy the car back in 3 years for 50% of the base price and 43% of options. They advertise it as the same resale rate as other luxury sedans. The purpose is to give consumers peace of mind that the car will hold it's value, because there are limited used Teslas to consider for resale value. However, Tesla roadsters are retaining their value, which mitigates the risk. The Roadster may have high resales due to it being a limited collectors item, but it's important that the battery degradation is not a severe factor.

RisksThe risks for Tesla, as with any emerging technology, are numerous. It is a speculative stock. The macro economy at the time of Gen III launch is a big factor. Automobiles are a discretionary purchase. An earthquake in California has the potential to devastate the company. The biggest risk is the however is the core of Tesla's focus, engineering affordable, safe, long range battery and charging technology.

Posted by
andrew thomas

2 comments:

Anonymous
said...

Nice post. Selling directly to the consumer is an industry game changer and the cars pretty much sell themselves. Tesla is the way of the future.